Week one Home Work

2-7 a

Prior to the creation of the PCAOB, public company auditors were subject to oversight by their professional association and to peer reviews conducted by other auditing firms. Title I of the Sarbanes-Oxley Act profoundly changed the environment in which public company auditors operate by providing for ongoing accountability to the PCAOB, which is independent of the profession. The Board exercises that oversight through four basic functions —

1. Registration of accounting firms

2. Inspection of firms and their public company audits

3. Investigation and disciplinary proceedings

4. Establishing auditing, quality control, ethics, independence, and other standards —

The Board is responsible for establishing the auditing and related standards under which public company audits are performed. Prior to the Sarbanes-Oxley Act, public company audits were performed according to standards set by the profession itself. The PCAOB has an active standard-setting agenda, as I will describe later in my testimony.

2-7 b

The AICPA is responsible for establishing auditing and attestation standards for private companies in the United States and for enforcing a code of professional conduct for its members. You provide an attestation service when you issue a report on a subject that is the responsibility of another person or business.

The AICPA code contains six principles: responsibilities, the public interest, integrity, independence and objectivity, due care, and the scope and nature of services

2-10

For the most part, generally accepted auditing standards are general rather than specific. Many practitioners along with critics of the profession believe the standards should provide more clearly defined guidelines as an aid in determining the extent of evidence to be accumulated. This would eliminate some of the difficult audit decisions and provide a source of defense if the CPA is charged with conducting an inadequate audit. On the other hand, highly specific requirements could turn auditing into mechanical evidence gathering, void of professional judgment. From the point of view of both